Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 666: Investment Lilberalization - Why a Restrictive Cross-Border Merger Policy can be Counterproductive

Pehr-Johan Norbäck () and Lars Persson ()
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Pehr-Johan Norbäck: Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: Investment liberalizing countries are often concerned that cross-border mergers & acquisitions, in contrast to greenfield investments, might have an adverse effect on domestic firms and consumers. However, given that domestic assets are sufficiently scarce, we identify a preemption effect and an asset complementarity effect, which imply that the acquisition price is significantly higher than the domestic seller's profits. Moreover, we show that for the acquisition to take place, the MNE must be sufficiently efficient when using the domestic assets, otherwise rivals will expand their business, thereby making the acquisition unprofitable. Consequently, restricting cross-border M&As may also hurt consumers.

Keywords: Investment Liberalization; Mergers & Acquisitions; Development; Ownership

JEL-codes: F23; K21; L13; O12

38 pages, June 13, 2006

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